Borrowers Are Going Underwater on Car Loans

Car loans are a relatively small component of overall consumer debt in the U.S.[1]

By far, the largest amount of money tied up in debt is in mortgages. The highest number of borrowers are credit card users.

Underwater car loans are a problem for some borrowers, maybe, and could portend a slowdown in car buying, but people have many options when it comes to cars. They'll buy used, if they hit a debt wall and simply can't afford new, then later trade up for a new vehicle.

It's unlikely that this is a sign of recession, in my opinion.

1. https://www.lendingtree.com/debt-consolidation/consumer-debt...

Americans make terrible decisions with cars.

The article includes two anecdotal examples. I suspect that my income exceeds both. I would never pay as much as they did for a car. Cars are terrible investments. Most should be purchased as the bare minimum cost to get back and forth to work.

I particularly dislike the common refrain, "the cost to repair it is more than the car is worth." It's the wrong mindset. The repair cost is always far less than the replacement cost. My old 150k beater that needs $1k of repairs every year is still much less expensive than the $25k+ it would cost to replace. I have no car payment (thus no interest), and property taxes are cheaper.

And people keep buying brand new cars. Why? Our culture doesn't properly identify brand new cars as luxury items. We should publish a new rule of thumb. Nobody should be buying new cars who can't already afford to fund an IRA.

Buses are a relatively decent solution for a city lacking in public transportation infrastructure. For example, Phoenix (where I live) has a network of north-south and east-west buses that can get you, eventually, to anywhere in the valley (Uber/Lyft can fill in the gaps). I normally drive, like 4 million others, but several times I've taken the light rail from Sky Harbor to midtown, then a couple of buses to my destination many miles north of the airport, and I was impressed by how easy it is--and how underutilized.

Perhaps we can mitigate many of our urban problems--pollution & greenhouse gases, road congestion & traffic accidents, and consumer debt--by investing in electric or NG buses.

>everyone who buys a car on credit is always “underwater”. The cars are never worth the balance of the loan

In my early years I once took out a loan for a car. I've never once been underwater on my loan. You're only underwater at some point if you put down a small/no down payment and pay the minimum amount due every month.

The topic of this article is people rolling the balance of their previous car loan into their new car loan. So they are underwater before they drive it off the lot, sometimes by a LOT. That's scary! Its basically running on a treadmill that always accelerates.

Two friends wanted to by a cheaper car, so their loan is now 66K?

Looks like WSJ is skirting around the issue of subprime loans made to rideshare (Uber/Lyft) drivers. lost track of the number of unhappy uber/lyft drivers I have chatted, because of the predatory nature of the incentives and car loans.

The drivers think they bought a new Camry, and while making a nice profit in the first few months. Then the incentives dry up, while principle due has barely moved. Now the predatory lender has a captive slave to make the monthly payment by giving ride, because there's a loss aversion mindset that prevents the driver from walking away.

At some point though, the drivers will realize it's not worth slaving it out for a car they don't own. With Uber losses continuing to pile up, at some point incentives will go to zero, their retention costs will go up, drivers will get fewer $$$ per mile.

If this happens on a large scale, there has to be some kind of a crisis with these subprime loans. There'll be glut of used cars, killing new car sales, thus affecting those car manufacturers/sales.